Bitcoin Forum

Many in the Bitcoin community seem to believe that credit is impossible or very difficult to create with Bitcoin, and especially that a fractional-reserve system is prevented.

I have heard some very flawed arguments for this, but also some that may have some merit if properly explained.

My personal opinion is that Bitcoin is the same as cash or gold (but closer to gold) in this regard. Am I correct? No? Explain, discuss and debate!

Anything can be abused.
Fractional reserve doesn't seem possible with BTC, no way you could lend btc you didn't have. But it would be possible to create a system that lent $ (or some other fiat) based on holdings of BTC. I don't see why anyone would, but thats a different question.

Fractional reserve banking doesn't allow lending money that doesn't exist, it just permits lending money that you don't personally have even though someone else does.

Banks and credit markets will only be better. No more bailouts (governments can't print bitcoin), hence the markets will adjust for higher risk.

+1

If Bitcoin became widely adopted, it could (and probably would) function exactly like any currently popular fiat currency. (Dollars Euros Pounds Etc.)

There's no real functional difference except that there wouldn't be a government that could print more money, therefore I see no logical reason that credit and banking would not work the exact same way it does currently.

With banks currently, if, say, $1000 was deposited with a fractional reserve of %10, the bank would then loan out $900 of that same $1000 to other people.

All you have to do with is replace the above $ with BTC and you have the exact same system using Bitcoins. There's no reason this couldn't work with banks, credit card companies, loan agencies etc.

Now if you were to question whether it's likely to happen currently, that's another question, but once the price stabilizes and adoption becomes high, I guarantee you'll see Bitcoin banks and credit agencies.

It is possible to do fractional reserve banking with bitcoin.  Fractional reserve banking does allow to you to lend money that doesn't exist-- indeed that is exactly what banking is all about.  The banks lending more money than they have on deposit is how money is created!

The fact that the bitcoin supply is limited to 21,000,000 doesn't stop the banks for lending out more than that-- if all these bitcoin were deposited in bitcoin banks then using the current reserve of about 10% of traditional fiat banking the banks would lend out 210,000,000.  What the banks are really dealing with is not bitcoins but rather promises made about the bitcoins: that's why they can create more--  a promise is a very easy thing to create while a bitcoin is not so easy.

To clear things up semantically, Fractional reserve banking is the process of assigning multiple owners to the same coin on deposit, then hoping that a threshold number of depositors do not attempt to withdraw simultaneously. The law of large numbers makes this process very reliable (and profitable). However with bitcoin, it would be difficult initially to get to the safety of that large number (of deposits).  You can do FRL with anything, the inability to print bitcoins is tangential and will only affect (raise) the cost of deposit insurance for the bank.

I would have agreed a while ago. There was just no infrastructure imaginable for Bitcoin IOUs (essentially just MtGox codes or the like) to become popular.

However, then Ripple came along. If it gains mass acceptance, it will make handling IOUs a lot easier, maybe even easier for most people than to deal with Bitcoin directly. And gateways like Bitstamp (and MtGox probably soon) will theoretically indeed be able to issue more IOUs than they actually have.

Like with any asset, you can:

1. Lend it out physically at whatever rate you want. Like, give a gold bar in hands of a borrower. Or send BTC to someone's own address.
2. Lend out a paper receipt (or a digital receipt) which is basically a promise to deliver something (gold, bitcoin, apples or oranges) in exchange for that paper.

Fractional reserve banking was made possible during gold standard because gold was expensive to move, store and cut. So everyone ended up using paper promises issued by banks. Before banks organized in a central bank there were frequent bank runs putting a hard limit on how much you can print over your reserves. Once the central bank was established, it was ultimate printing organization within a nation-state. To make a bunk run on it, one would have to move money between countries (this happened before/during great depression when european banks asked U.S. for physical gold in exchange for U.S. paper). Today every country has promises only within its own gold-less currency and hands out IOUs to other partners.

With Bitcoin fractional reserve banking is very limited because real BTC is as easy to move and verify as paper IOU. Every single wallet is a bank in itself. People just don't need to trust anyone to handle their assets. You can trade directly in this digital gold.

If some bank decides to issue BTC-backed IOUs, it will face constant withdrawal demands every single day and will have very little BTC in reserves. If they overprint their IOUs people will quickly get all their coins out and bank will shut down. Some people would lose money, but it won't affect anyone who was trading in BTC directly without that bank's paper. Not only directly, but also indirectly. If prices are set in BTC, not in IOUs (think: in gold grams, not USD), then global depressions won't be possible because of a single fractional reserve bank printing IOUs. Prices will remain stable in sound money (gold, BTC) and will grow in USD or whatever IOU is currently in use.

One could aruge that fractional reserve banking is not possible with Bitcoin, but for an entirely different reason than the internet crazies would. Banks are required to keep a fraction of deposits in assets. But with Bitcoin, no such enforcements are in place. So if you think of banking as something regulated and enforced, the answer would be no.

You could start a Bitcoin bank and claim that you would guarantee a fractional reserve, but if there is no regulation there isn't really any legal standing to this claim. It would be a bank in name only. You could start a Bitcoin bank and spend every penny of your customers desposits while still pretending that all bank accounts are full (which would indeed be a scam).

Like you said.

The people have become their own bank; Why would knowledgeable Bitcoin adopters believe the lies that are being spread by banks?(anonymous? what a joke) paypal(use it to trade on a worse system, why?).

The BlockLedger makes things very difficult when you can follow the assets of any entity. A bank/broker would have to make their deposit address public, and then you follow the ledgers trail, Bitcoin is ultimate accountability, you can only allow the things that you permit in any contract you sign. If they are not investing your BTC the way you want it to, you'll know.

Individuals being their own lenders can begin giving credit and expect returns from borrowers, follow the trail and see the health of that company or individual, and with the BTC API they can in fact become a chain of guarantee of use, the individual can become a partner; Shareholders have greater say if they so desire, thanks to the Bitcoin API a contract can be written in direct code to match the legal one.

Fractional reserve is definitely possible, with bitcoin if explicitly allowed by the lender or if they just don't care to be accountable for their money. After all the reserve is based off of future returns, fluctuations in the value of money, etc, all calculatable to a certain degree and with the blockchain those calculations become better and better everyday, because not only can you follow the borrowers account, they can follow yours to calculate when you will be coming in to withdraw your money.

Bitcoin is the most open system ever created, with infinite flexibility thanks to it's design.

A fractional banking system would be possible, but it would be rather difficult to set up. People would have less incentive to use it than the traditional banking system. One reason people use banks is because they allow you to quickly and safely access your money without carrying cash. The point of bitcoin is to allow people to do this but without the bank middleman, but instead with our computers and p2p network. Without this benefit, to convince people to give up control of their money, they would need to offer high interest rates and/or offer features that compensate for the weaknesses of bitcoin like instant transactions or instant conversion to USD to get the deposits necessary to set up a fractional reserve system.

Also, here's an explanation of how a fractional reserve system works. People deposit money in a bank. The bank lends the money out to people. Those people redeposit the money into a bank. That bank lends it out to another person. They deposit it and so on and so on. If everyone keeps depositing the money back in (and everytime someone spends any, the recipitent alsodeposits it into a bank) you can just keep lending out imaginary money in the form of numbers on the banks computer. (Of course, in reality, you run into trouble when a couple people actually wants to withdraw money and the bank realizes "Crap, we dont actually have any money" so they usually keep some some percentage of the deposits they get as cash in reserve which is good enough unless a significant number of people want to withdraw their money ( or more likely in our current bank controlled economy, move their money to another bank). After the banking crisis during during the great depression, the percent kept in reserve is a federally mandated reserve ratio set by the federal reserve.

Well of course its possible. I could lend you some of my (meagre) coin and charge you interest on the loan.

But more profitable if I set up a "bank", take deposits in BTC (which I transfer to MY wallet), offer silly rates of interest to attract the punters, and (optionally) lend out some of those deposits to my credit customers. Classic ponzi scheme (just like the fractional reserve banking described upthread, that seems to be accepted as perfectly legit in the banking world.) I'm surprised nobody's already tried it (perhaps they have, I'm new on here so does anyone know?)

[Edit] Of course real world banks don't offer silly rates of interest to their depositors, which is why the legit ones are not ponzi's. So that model also works with bitcoin (provided there is no run on the bank, in which case you just say sorry and apply for chapter-whatever).

I think the Bitcoin system sets a dangerous precedent for the banks.  A currency that cannot be fudged at all, the total amount is accountable at all times... what is preventing the banks from doing this? What would happen if the governments began passing laws that made it illegal to have unaccountable money? I'm sure somewhere we can analyze how much money is being created vs destroyed by the central bank, if this number when added up worldwide is larger then we know that something very wrong is occuring with our financial system, banks are creating fake money by copy pasting digital numbers.

everyone pays with their debit cards now, how would you ever know that they did not have enough money? people only use cash for drug deals anyway.

I know I've brought this point up many times but allow me to reiterate. Having access to all my money at any time makes me a target. Imagine for a second that the dollar, euro, and other currencies have evaporated and everyone is now using Bitcoin and everyone knows that everyone has access to his own money. This is very, very dangerous and could lead to all kinds of crimes. Therefore, I could see the need someday to have a third party vault, basically protecting me from my money. No one can put a gun to my head and rob me if I do not have access to my money.

This is EXACTLY what led us to the current predicament of fractional reserve lending today. The goldsmiths kept people's gold in their vaults because it was much safer than everyone storing his own gold. They handed out receipts or notes to their depositors declaring their balances. People began to trade these notes rather than going to the vault to withdraw the gold, exchanging it, and then the recipient depositing back into the same vault. They came to the realization that it didn't matter how much gold was actually in their vaults, they could simply lend as many notes as they wanted to. This became known as fractional reserve lending.

The people on these forums are probably smarter than the average person. But the stupid ones FAR outnumber the smart ones. The banks will do EVERYTHING in their power to gain back the control of the currency. It is impossible to lend out more gold than is in existence and, yet, they found a way to do it because the stupidity of the masses allowed them to.

Those who do not learn from the past are doomed to repeat it.

Look through the forum for pirateat40, Patrick Harnett, Kludge, and Dank. This has been tried already.

The alternative to fractional reserve lending is zero-reserve lending. With zero-reserve lending, you take in $1,000, for example, and lend out $1,000. The guy you're lending it to pays back $1,000 plus interest and the bank makes a little money.

But what happens when the guy who deposited $1,000 wants to make a withdrawal before the guy who borrowed it pays it back? There would not be money available to pay back the guy's $1,000. This cannot happen and the system will not work.

One way to work within these constraints is to use time-lending. Just like people put money into CDs for longer lengths of time to get higher returns, people could lend bitcoins to a bank for specified periods. The longer the deposit commitment, the larger the interest rate. Now a bank would be able to lend money as long as it was paid back before the time deposits expired.

But what happens when the guy who borrowed the $1,000 defaults? This makes the bank insolvent and destroys the deposits. There would be no FDIC under this type of system because it would be too expensive.  Of course, banks would have to go back to sound banking principles and only lend to strong creditworthy customers and secure ample collateral. But it would become much, much harder to get a loan than today. The banks would have to use their own money to pay back depositors when a borrower defaults.

One way to make this work is to lend out money that was invested not deposited. What if you allowed investors to invest in your bank. Of course they would want to know that you're making sound loans but the possibility of default is there. Investors would expect a higher rate of return than a savings account interest rate. But these costs would be passed onto the borrowers.

What if the bank became a facilitator for crowd-funding? There could be a list where people could put their requests for loans with all of the pertinent information one might need to invest. Then anyone interested in putting their money to work could browse this list and invest a little money in whichever projects he chooses, obviously for much better returns than a CD or savings account, but with added risk. There could be a professional "underwriter" working for the bank that gives his own assessment of the risk. Each bank would then be competing with other banks so the better job they do at underwriting, the more customers they get. The bank could also act as the enforcer, collecting collateral and go after deadbeats who do not want to pay back what they promised.

Have a look at BitFunder and BTCJAM and bitfinex for ways people are trying to do this right now.

There is fractional reserve banking, and there is zero-reserve banking, but you left out one option: full reserve banking. In full-reserve banking the deposits have an equal amount on reserve, any lending is done from the capital of the bank (as you suggested, the investors in the bank are funding the loans, check out the IBB (Islamic Bank of Bitcoin) for an example of this). For example, MtGox could be considered full-reserve banking (if what they tell us is true), any bitcoins listed in the customer accounts has an equivalent amount of real bitcoins in the MtGox wallet.

I like that idea, but Bitcoin is a whole nother animal.

the Bank has gained a massive weapon with bitcoins, they can monitor the effect of their investments worldwide to further calculate the probability of a ventures success by following the blockchain, also dead beat loans with the infrastructure that banks have(credit agencies) plus the blockchain means they can study the patterns that develop from abusive people with test loans, plus that API can make the bank build stipulations to their loans to make sure they are used properly, like a time release system for a loan, release amounts only every couple days.

also to maintain a fractional reserve system, credit cards demand a minimum payment every month to maintain their stocks a similar system would be implemented in bitcoins with stipulations on withdrawals amounts, we can learn from the current system, just need more bankers on these forums.

That's the effect, but it's not like an individual bank has $100 in deposits and loans out $1,000. That is the symptom, but it's not that simple  if I understand correctly.

 Bitcoins, Fractional Reserve Banking, and Private Currencies (http://monetaryrealism.com/bitcoins-fractional-reserve-banking-and-private-currencies)

Fractional reserve banking would be difficult, but that is good. Banking would go back to how it was before that was invented, with bankers only lending the money they actually own. Not a tiny fraction. I had wished for many years that fractional reserve banking would become illegal (the financial system would be way healthier,) and bitcoin could finally make that happen.

It would still be possible to get a credit by putting a mortgage on the house.
It would also be possible to get a financial institution to buy a car, and then rent it to its customer.

It says: "Building up the networks which would allow fractional reserve banking requries a transmission system which is nearly impossible to develop for bitcoin-like products, because it relies on adoption."

Again: Ripple.

I agree with the nature of bitcoin not supporting credit. I don't know enough about ripple to give an informed opinion, although it seems incredibly complicated for mass take up and lifts the lid on a great deal of monetary and credit dynamics that I'm not sure people yet want to understand or hear. As with bitcoin I suspect any best-case long term future of ripple will be as a conduit for other assets and currencies, with little to no value apportioned to the backing concept except as a transaction means. And as I'm sure must have been debated before on this forum, although technically via banking/savings/investment I am already facilitating 'ripples' of my credit throughout the system, I'm not at all sure how keen people will be to overtly mix business with pleasure and peers once they've worked it out.

It is very possible that the economy would be healthier. On the other hand, it's very possible that you wouldn't have many of the things you have today. The system of fractional reserve banking allows businesses and governments to do things they otherwise wouldn't have while the money is free flowing. Sure, there is always a pull back and this causes the "business cycle", but we always progress as a result. You would probably be much healthier too if all you did was stay home all day and workout, eat healthy foods, and avoided all things such as smoke, tobacco, alcohol, microwaves, television, cell phones, etc. But you would also live a very boring life. We tolerate occasional hangovers because it is fun to go out and let loose once in a while.

I'm not trying to say I'm all for fractional reserve banking. But it is something to think about. I actually think we have progressed too far, too fast in regards to technology and it's time to settle down for a while. I would be all for a slow, healthy, and stable economy for several decades.

*This* is the key insight.

It is completely obvious that fractional reserve banking would be possible with Bitcoin but the transparency of the Blockchain makes it qualitatively different to the situation with, say, gold.

The Blockchain would make it possible to see all the deposits a "bank" had taken in and all the loans it had made, as well as the interest payments as they came back, and repayments of principal.

Sure - some of this might be obfuscated but I would expect market pressure to force banks to be as transparent as possible.

But that then creates a huge issue: everybody can calculate the bank's reserve ratio, can infer its loan and deposit terms and estimate default rates, etc.   An optimistic analysis would say that this would encourage conservatism and build confidence.  BUT... the moment the bank suffered a loss or a borrower stopped paying interest, *everybody* would know and a run would surely start within moments.

Credit can and has happened already with bitcoin. Look in the loan forum, any one of the many ponzi scams, or leveraged trading sites. I'd be willing to bet that some fractional reserve banking has happened also. Even though the blockchain is public, I have no knowledge of anyone doing a serious audit on MtGox or any of the major exchanges. There is a lot of money sitting on those exchanges waiting for a spike in the price to sell. Although I have no reason to believe there's fractional reserve banking going on, it is trivial to implement. All it takes is using some % of deposits to loan out or go manipulate the market a little bit.

That is what they do.

I wouldn't mind living without many things most people take for granted, in fact I already have a very simple life. I haven't had a TV in my home for 20 years, but in the meantime, I've seen my friends throwing away their VHS recorders, then their DVD recorders, because they're now buying Blueray recorders and new larger TVs to go with those. I understand this is progress, but is that really useful? I wish there was less money around, so that people (and governments) would focus on the essential, and not waste time on superficial things. Who needs business cycles? We have seasons, birthdays, natural cycles, it's more than enough to avoid a boring life.

I would only get a bitcoin credit card if could get a low low APR of 29.98%. And it has to be named after a precious metal.

So in a classic sense, MB (Monetary Base, the set of notes and coins in circulation or held as reserves) is the bitcoin network, and trying to increase it beyond 2.1E7 is a hard fork.
However that says nothing about M2 and friends. Partial reserve lending is possible, although I doubt we'll see take hold until the value stabilizes and the velocity of the existing monetary base increases.
What is really cool is that bitcoin separates the issue of storage from the issue of earning a return on idle money. These were tied together before, even when gold was around: In fact fractional reserve banking arose from the fact that the goldsmiths (who were tasked with storing other people's gold) realized they could issue more depository notes than they actually had gold for.
So now that there is no need for people to deposit at banks unless they want to earn an extra return, we may see a lower level of demand for bank services. Maybe.


Banks always lend a sizeable chunk of their own money alongside depositors. As long as that buffer isn't running out, there's not rational reason for a depositor to worry. It would take a lot of losses to trigger a bank run (like we saw in 2008). Knowing the exact amount held by a bank would also protect against bank runs being started on just a rumour, and it would encourage banks to keep and prove they have a large reserve, so that the depositors are reassured.
Also nothing stops the existence of a "lender of last resort". The difference is that unlike the Fed, it can't just print on demand, so it'd have to hold large amounts of cash to be sent to a distressed bank at a moment's notice. That would be pretty expensive.

This might be a little off topic, but there's this Financial Times article today about the talk of "BitBonds"...
http://www.ft.com/cms/s/0/e9198f38-b7cb-11e2-9f1a-00144feabdc0.html#axzz2VhnrjxvE

Agree that false rumours would be harder to spread and I also agree transparency would lead to greater conservatism.   

However, it would be fascinating to see how things played out in the real world.  For example, banks today only need to publish their accounts periodically (e.g. quarterly) and go to great lengths to make them look good (e.g. the Lehman Repo 105 transactions, the tendency of companies to discount heavily towards the end of a period to get signings, etc, etc).

In between reporting periods, I suspect the numbers jump all over the place....  and the same would be true here....  even if a "Bitcoin bank" were very well run, well capitalised and had lots of liquidity, there would be periods where  good borrowers were a bit late and some depositors had drawn out more than expected - and a snapshot at that time would make it look like it was about to collapse. 

Perhaps the solution would be even greater transparency - e.g. the successful banks would also make their internal models and cash-flow forecasts public - and reconciled against the blockchain.   One thing's for certain, I don't think a bank based on obfuscation/secrecy would stand a chance.


Agreed.  So, in many ways, it would be similar to the gold standard days (e.g. the JP Morgan stories from the 1907 panic, etc).

And I guess you could be sure there would never be anything as scary as this  http://soberlook.com/2013/06/how-did-we-get-here-map-feds-balance.html

I didn't vote in the poll because there wasn't an option for "Yes, but with very different results than in the fiat world".  As far as countryfree's comment that you could still get a mortage with bitcoin banks - yes, this is probably true.  But forget about the 3% interest rates that you're seeing today (at least in the states), or even 5%.  It'd probably be at least 15%. 

Would credit be possible with bitcoin?  Yes, but it'd be more difficult, and therefore likely much more expensive in terms of interest rates.

I think bitcoin will co-exist with fiat, and as long as fiat exists, the motivation to borrow bitcoin is very low, since it's always preferred to borrow a inflative fiat currency

The only reasonable consideration is borrowing a lot of bitcoin and sell them, causing the price to crash, and buy them back to profit in the process, but shorting has unlimited risk

But why would it be more expensive? Bitcoin's nature is deflationary (after the initial inflation period), so it would make sense for bitcoin denominated interest rates to be lower than fiat rates, because the interest rate does not have to overcome the inflation rate.

Quite - and I think this will be the problem for a bank that issues bitcoin-denominated liabilities (i.e. takes bitcoin deposits).

Recall: the purpose of a bank is to perform maturity transformation:  it issues short-dated liabilities in order to fund positions in longer-dated, higher-yielding assets.   The spread funds the bank's operations, covers losses and provides a source of profit.  This makes banks inherently unstable and vulnerable to runs, which is a problem in and of itself in a world without a lender-of-last-resort that can print currency on demand to lend to solvent (but illiquid) institutions.

However, the bigger problem to my mind is that this model implies an institution that issues bitcoin-denominated liabilities must invest in assets that yield more than the yield they are promising their bitcoin depositors.

Now, if bitcoin's deflationary nature kicks in and the purchasing power of a bitcoin increases over time, the real challenge for the bank is to find suitable assets in which to invest.

If the only suitable assets provide a (real) yield of, say, 5%, it is entirely likely a bitcoin bank would have to offer nominal interest rates to depositors that are negative.

That can still be desirable in a fiat world since large holders of currency may not want to take responsbility for the safekeeping of physical cash (nominal yield 0%) and so would be content to accept a small negative nominal yield... but all Bitcoin users have the ability to manage their own wallets, at least in principle.

So... it's hard to see how someone could build a viable business model based on paying interest on deposits...

a deflationary nature implies a high real rate of interest

Depends on how strong the deflation is. If we are deflating at 1%, then anything with a real rate of return over 1% will still give a positive nominal return rate.

Contrast this to inflating currencies: If you are only inflating at 1%, then something with a real loss of 0.5% will still give a positive nominal return rate.

Depends how strong? Of course. Quite arbitrary examples but nonetheless I'm not sure you mean what you wrote, as you've just outlined why a borrower or anyone conducting business on a credit basis wouldn't choose to use bitcoin when alternatives exist. Or why if they did choose to use bitcoin the lender or other party to a transaction would be acting irrationally in their business, assessment of value and fees. Unless you're referring to commoditisation, which is not the same thing and perhaps the problem.

Because there's probably no such thing as fractional reserve banking with bitcoin, unlike fiat currencies.  So this means that even though bitcoin is deflationary, banks cannot lend out 90% of their bitcoin deposits like they can with dollars and expect to remain solvent.  I suppose it's possible that bitcoin's deflationary nature would counteract this if it's a high enough amount of deflation, it really remains to be seen.

Have you read this thread? Yes, fractional reserve lending is possible with bitcoins. I take in deposits of 1000 bitcoins, and I lend out 900 of them, leaving a reserve of 1 tenth. Hey look, that's a fraction that I am keeping as reserve! Why is this so hard for people to grasp? There is nothing about bitcoin that stops fractional reserve lending. Now, as long as I can manage things so that depositors are not withdrawing more than the 100 bitcoins I have left, I can remain perfectly solvent. As has been mentioned, you can do things like certificates of deposit, where people agree not to make withdrawals within the time period so they can get the desired interest rate.

Your fractions are backwards to how fractional reserve banking is done today. In your example, you only lend out a fraction of what you have in deposits. In common practice today, banks only take in a fraction in deposits of what they actually lend out.

Banks lend out a fraction of what they have in deposits, but because when these loans get spent they are deposited back into a bank, the system as a whole ends up having more debt money than base money.

If banks are allowed to loan out 90% of their deposits, the banking system will end up with a 10:1 ratio of loans to currency.

http://market-ticker.org/akcs-www?post=163423 (http://market-ticker.org/akcs-www?post=163423)

To elaborate on this, I take in deposit of 1000 btc. I then lend 900 btc to Al so he can buy a boat from Bob. Bob then deposits the 900 btc into my bank, so I now have 1900 deposits and 900 loans, and 1000 on hand. So now I can lend out another 810 btc to Cal who wants a boat too, he sends the BTC to Bob who deposits it in his account. Now I have 2710 in deposits, 1710 in loans and 1000 btc on hand. This cycle repeats until I get up to about 10000 btc in deposits, and I still have the same 1000 btc as my reserve, with 9000 btc loaned out.


Does it matter which order they happen in? Obviously you can't send somebody bitcoins you do not have yet, but once you lend them out they can circle back to you through the economy and you can lend them out again, so either way you can end up with the same fractional reserve arrangement.

Except Ripple can't be trusted because it is closed source, centrally controlled, and they lie about it on their home page.

---

You can disclose your public address so how much you actually keep in reserve can be determined by anyone via the blockchain, no?

I know about the controversy, but a) most people out there don't care, and b) the point I made doesn't have much to do with the current implementation at ripple.com, same would be true if we had a more decentralized one that builds upon Open Transactions + BitMessage or with Colored Coins or whatever. As soon as we have a network that allows to conveniently transfer promises or IOUs and that catches on, the cat is out of the bag, pandora's box is open once again and fractional reserve bitcoining will be made easy.

Just because it is bitcoin, doesn't mean contracts are unenforceable.

Fractional reserve banking is very possible, and even likely with bitcoin.

It's easy for a bank to prove it owns coins since the transaction register is public knowledge!

The bank only has to sign a document with the private key of it's wallet to prove they own that wallet and you can go and verify that they have the bitcoins they say they do in that wallet.

It's even more transparent than current banking.

Contracts are insanely enforceable with Bitcoin, the Bitcoin API is extremely flexible. You need a programmer and a accountant to convert the written contract into hard code then you realize, just like transactions the contracts are unstoppable once they are let loose... just wait till you had to refinance... ooh, painful.

Contracts would be completely useless to accomplish regulation.


In theory, yes. But in practice, why would you want to do that?

where's the police.kickDoorOpen(), court.initiateProcedure(), and judge.sendToPrison() functions?  ???

It's not right. Actually right now if you deposit 1000$ the bank can loan 9000$... so it's not the same with BTC.

Uh? No, cash is cash is cash.
As long as people want to hold actual real banknotes, banks can't "just create money".
What you are talking about is fractional reserve banking, which can be done with bitcoin too, as long as people accept money on a bank account instead of the actual bitcoins in your address.

Either you compare bitcoins with actual real cash you can hold in your hand, or you compare virtual dollars sitting in a bank with virtual bitcoins sitting in a bank.

No difference.

Ha ha, you're wrong. Actually money are created from thin air. In the early stages people have won in court in fact.

Why? I really don't see how Bitcoin is any different than cash here.

If you're looking for bitcoin credit, look to Ripple or BTCJam. Both have different approaches to the same thing.

Two differences. There could be no government depositor insurance, as the govenment would not have the money. People would only save in safe banks. There would be no money printing or QE, meaning the so called bank reserves of today would have to be replaced by equity. I suspect fractional banking would be possible, but less relevant.

Either you didn't write what I wrote, or I wasn't clear (sorry).

I'll restate: either you compare real bitcoins with real cash you can hold in your hand, or you compare bitcoins "in a bank" with cash "in a bank".
You are comparing "real bitcoins" vs "cash in a bank", which obviously make no fucking sense.

Wrong: nothing prevents governments from acquiring bitcoins.

This is correct.

They could, but not in the current fashion. If you exclude money printing and loans, governments run erormous deficits. There is not enough tax money for saving up to future bank runs.

Credit, as in literally sending someone coins and keeping track of the debt yourself is no different to lending someone your ipad and expecting it back in the future (with or without something extra).

Fiat is the way modern economies keep track of this debt. It is the placeholder of what has been given but not received, and this is what bitcoins are not.

To be excact, fiat base money as in notes and token coins, is money just like bitcoin. But a bank deposit is credit. When you pay someone, the banks debt to you is transferred to the other person. The bank now has debt to that person.

Yes, but not what I was talking about. You're looking at fiat as a commodity.

Where does the money you put into a bank come from?

The OP isn't very clear what kind of credit they're asking about. Bitcoins being lent and considered debt until returned, or Bitcoins being the valueless token of debt.

I think the OP is correct in this:

I think fractional reserve banking is widely misunderstood. I agree that many people think this means lending out currency banks don't have, thus creating currency out of thin air. However, I have never seen any proof! that this is the case. The definition of fractional reserve banking as defined by wikipedia is correct in my opinion. It means keeping a fraction of the deposits in reserve and not lend it out. Meaning all money lend out is indeed covered by a deposit. In fact the bank always has more on deposit than it has lend out. The lie is simply that all depositors think they can withdraw their money at anytime but in reality only say 5% can as all other money is locked in short and long term loans. This lie can simply be removed by only offering time deposits that are locked for some time, the same time as the corresponding loan is locked.

Theoretically this means bitcoins can perfectly be used to lend out just like gold is being lend out today (housing market Thailand). The problem with bitcoin is that it will go up in purchasing power over time, in contrast to gold that only preserves it over time, making borrowing bitcoin a very bad deal. Borrowers will default much quicker on a bitcoin loan than a fiat loan. Hence why I think that bitcoin lending will remain small at best and will only take traction after bitcoin has become a mainstream currency and the value only goes up by 2% per year on average. Long way off...

I think assigning multiple owners to the same coin on deposit is not fractional reserve banking in my opinion but fraud even by today's banking regulations. A fraud that indeed can be executed by banks since their origin. A fraud that indeed creates currency out of thin air (currency being credit here), however even this fraud does NOT create money out of thin air as the bank did not create any extra dollars in existence by lying to some customers, it just created extra credit (promise of payment) that will never actually be executed as it is physically impossible for the bank to do so since commercial banks do not have printing machines.


What we see here is again the trick to blame the free market for government corruption. There is only one bank that can and does create money out of thin air and that is the central bank. An institution that is not a bank at all but owns printing machines and is 'a lender of last resort' that has the exclusive rights to create money out of thin air, an exclusive right granted by the government. At the start they did it just like corrupt bankers did, creating more credit (paper promises of payment = fiat) than they are good for (gold in the bank). Being the government they took it one step further then corrupt bankers could do, and simply cancelled all promises of payment in gold (1972) which would normally make the promises (fiat paper) become worthless immediately but that didn't happen because indeed, as bitcoin proves again, money does not need to be backed by a commodity in order to preserve it's value. Ofcourse fiat paper not being sound money governments continued to print more of it, destroying the value slowly but steadily. And who to blame with false accusations? Bankers...


I think bitcoin banks will not be in the business of lending out bitcoins but will be focused on safekeeping of bitcoins, as well as insuring of them against theft and natural disasters. A very important service. But it will cost money. And many will choose free solutions for bitcoin storage offering no insurance, like blockchain wallet. Yes, the world will look very different. I think the banking world will mostly disappear together with the currency system it became big on. Borrow first, pay back later with devalued money, will be replaced with earn first or have nothing. Sound money brings sound habits and sound institutions. Bitcoin to the sky! :)  

I think you are not up to date on fractional reserve banking. The multiplication of money comes about when the money is redeposited in another account, either by the lender or the person he buys stuff from. The money supply thus extended, is somewhat subjective, as it depends on the psyche of the persons involved, do they really have these money fully, or is it only partial money.

Moving from demand deposits to time deposits, where the time from request to withdrawal is paired with the actual maturity of the loans, will take the risk out of the bank, but the money multiplication is still there.

In fact, the central bank can regulate the money supply by tuning the reserve requirements.

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I'll have to add that if every depositor claims his money back at the same time, and all loans are repaid, the bank can fullfill it's duties. But with demand deposits, the loans will not be repaid immediately, and the savers will not get their money back. Also the reserves are quite small, and it is easy for the bank to lose them all, in which case depositors will not get their money back. Reckless investing is done on a daily basis on part of the banks. They have to, else they lose in the area of profit.

There is no multiplication of money. Redepositing money into another account is not the multiplication of money, but is the multiplication of deposits, multiplication of a promise, I promise you, he promise another, another promise also someone else. Debt it is called. True we use this debt to pay others as we use our saving accounts to pay others, so indeed debt is used as currency. And indeed as promises/debt goes up, the amount of 'currency' in circulation goes up. However debt, even used as a currency, is NOT money. Currency is anything that is used to pay others while money is only fiat, gold and bitcoins.

I'm being semantic here but I think it is very important as multiplication of debt/saving accounts/promises/currency does not create inflation! Is not fraudulent! Multiplication of money (fiat, gold, bitcoins) out of thin air however creates inflation and is fraud!



 

Ok kay then that is cleared up, but you don't use the normal definitions. Normally base money is the notes and token coins, and M1 a measure of money supply which includes demand deposits. It is still called money. Money is base money plus different kind of debts.

Thank you for your validation. You are right I used money and currency inconsistently initially. I'm sorry for the confusion. I picked up the difference between money and currency on some forum. Not sure if it is an accepted definition. Thanks for reminding about the Fed's definition of money. I am reluctant to follow their definitions though as politicians are masters of manipulation and language is the first thing they rape.

The problem: if bitcoin becomes popular in a growing economy there is no incentive to lend bitcoins to anyone else.  Why?  Because the would be lender can just sit on his or her bitcoin stash and wait for the bitcoins to progressively become worth more without any effort.  A growing economy means more goods chasing a dwindling supply of bitcoins (some are lost to HDD crashes, etc).  In this scenario why risk lending out and losing your bitcoins? 

Anyone borrowing bitcoins would have to put in an extraordinary amount of effort to repay the loan, as bitcoins in a growing economy are worth more as time goes by.  To borrow a bitcoin today for business purposes and repay it in a year's time means having to do a lot of work to repay that bitcoin even before any interest is considered.

Bitcoin cannot be the basis of a modern economy as we know it.  The incentive to sit on a pile of bitcoins and wait for their purchasing power to improve is too great.

Wrong.

They don't have real money, they still have credits.

It is not money until you cash it out of the bank and hold the banknotes, and they can't multiplicate that, as I already explained.

You can do the exact same thing with bitcoins, it's really no different: you can't print money, you can't print bitcoins.

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This is skewed, try to focus with more attention to every detail.

1. bitcoins will likely appreciate in value, but if you lend them, you'll have greater gains, hence lending makes sense
2. paying them back appears to be more difficult, but again this is not fully true: if you borrow bitcoins I can expect you to need bitcoins and gain bitcoins doinh your business (otherwise you are stupid and should have borrowed something else) --> you owe bitcoins, you earn bitcoins, you pay back; the exchange rate with other currencies is irrelevant (if it is, you botched your business plan and you didn't really need to borrow bitcoins)

So apparently some smart guy has decided that they are going to delete a post of mine from 2013 because they apparently violate a new rule.

Kids with buttons, I'd say.

Kids with buttons.

Click click.

Won't bother reposting, if you wish to destroy knowledge on your own site, be welcome.

The only project allowing a credit with crypto that comes to mind is Nexo, but they're using the credit model just to allow you pay from credit card with BTC, taking the BTC as a pledge.

Nexo is more like a pawnshop operating with cryptocurrencies. But I'm not sure it's really trustworthy because your pledged coins will be kept on a hot wallet.

There is really no difference. Have you ever tried to take loan from some of these big lenders in the cryptocurrency space?
They will only give you fiat and not cryptocurrency and you will have to give a collateral for the money you’re about to borrow, and the collateral you’re giving is your cryptocurrencies; you give your cryptocurrency assets and you will be given loan in fiat.

There is really not much difference between the way it works here and the way it works with others like fiat, they are all the same thing. And moreover, there is really no way that these people can lend the way you said, it’s just not possible to do it.